HMRC rule change hands state pensioners £3,900 cash boost

James Rodger
·2-min read
HMRC rule change hands state pensioners £3,900 cash boost
-Credit:Reach Publishing Services Limited


HMRC will overhaul the way pensioners are taxed on money they take out of their pension fund after it had to refund pensioners nearly £50 million. The average tax refund per taxpayer was £3,390 per person, HMRC stats show.

Emergency tax codes have caused many savers to pay too much tax upfront, forcing them to claim refunds. Over 470,000 people have claimed back £1.37 billion, and nearly £50 million has been refunded in just the past three months.

The switch to regular tax codes guarantees that tax is taken out accurately from the beginning and prevents pensioners from having to request refunds later. HMRC says this will “avoid an overpayment or underpayment at the end of the year” and reduce the need for end-of-year reconciliations or refund claims, particularly for those making multiple withdrawals.

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Myron Jobson, senior personal finance analyst at interactive investor, said: “For too long, pensioners have borne the brunt of systemic inefficiencies, with many unknowingly overpaying tax and waiting months for refunds. The recent revelation that HMRC refunded nearly £50 million in just three months underscores the scale of the issue.

“This change not only ensures that pensioners are taxed more accurately in real time but also reduces the financial and emotional stress of overpayment.” Jon Greer, head of retirement policy at Quilter, said: “The root of the issue lies in a tax system that has struggled to adapt to the pension freedoms introduced in 2015. The PAYE system, while efficient for regular income, frequently applies emergency tax codes to one-off withdrawals, resulting in significant overpayments.

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"While the planned reforms to automatically update tax codes for new pension recipients are promising, it remains to be seen whether they will fully address the complexities and inefficiencies of the current system.

“Until systemic reforms are fully implemented, retirees will continue to face the risk of significant overpayments and the need to navigate a cumbersome claims process to reclaim their money. HMRC’s efforts to address these issues are a step in the right direction, but there is still a long way to go to build a system that works seamlessly for savers."

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